Rate hikes could see house prices slump, RBA says

The aggressive series of rate hikes could lead to a dramatic fall in house prices, the RBA has warned.

Australian house prices could fall by at least 15 per cent after an aggressive series of interest rate hikes, the Reserve Bank has said.

In April, the central bank suggested house prices could slump by about 15 per cent over a two-year period, should interest rates rise by 2 percentage points.

Since then it has rapidly increased rates from a historic low 0.1 per cent to 2.35 per cent.

Jonathan Kearns, the Reserve Bank of Australia’s head of domestic markets, on Monday said the 15 per cent figure was not a forecast rather an “estimate of how sensitive housing prices” were to interest rates.

The amount Australians can borrow has been slashed. Picture: NCA NewsWire / David Crosling

If interest rates remain 2 percentage points higher, the model suggests prices would fall by about 30 per cent.

But if they revert to their “initial level” after that two year period, the interest rate effect on prices would eventually unwind.

Homeowners in Australia’s priciest suburbs are expected to feel the brunt of any price downturn.

“An increase in interest rates narrows the distribution of housing wealth since more expensive properties experience a larger fall in prices,” Dr Kearns said.

“But their results suggest that this distributional effect is temporary as the effects of interest rates on more expensive and cheaper properties converge over time.”

But overall, Dr Kearns said “many factors” influenced housing prices.

“For example, the demand for housing would be greater with stronger household income growth, increased population through immigration, or a preference for fewer people living in each household.”

Meanwhile, Australians looking to get into the property market have had the size of their potential mortgages slashed due rate hikes.

The RBA has been aggressive hiking interest rates for the last five months. Picture: NCA NewsWire / Damian Shaw

Repayments on current mortgages have bumped by 25 per cent, but a surge in fixed-rate loans meant not all borrowers were feeling the burn.

Last year, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer on home loan applications from 2.5 to 3 percentage points.

Banks would need to test whether borrowers could still afford their repayments if the cash rate rose to 3 percentage points above their current rate.

At the time, the buffer was hoped to take some of the sting out of the property market and limit how much a person was able to borrow.

Speaking to the AFR Property Summit on Monday, Dr Kearns revealed the impact of the drastic rate hike from 0.1 per cent to 2.25 per cent had more of an impact.

“It will have reduced borrowers’ maximum loan size by around 20 per cent,” he said.

“Because the assessment rate also applies to any existing debt, the decrease in borrowing capacity is even larger for prospective borrowers who have existing debt, such as property investors.”

Only 10 per cent of borrowers take out the maximum possibly loan.